As fresh details continue to emerge about the Libor fixing scandal that has already claimed the head of Bob Diamond, the American chief executive of British bank Barclays, everybody, it seems, is shocked – shocked! – to discover that this benchmark interest rate underlying trillions of dollars worth of financial transactions worldwide was allegedly being manipulated.

That’s the official line from the Bank of England, market regulators, the British Banking Association that oversees the Libor process, politicians on both sides of the Atlantic — and even from Diamond himself. He told a parliamentary hearing on July 4 that he was “sickened” to read emails by Barclays traders asking favors of their colleagues on the Barclays team that helped to fix the rate. The bank has agreed to pay $450 million in fines to the U.S. Commodity Futures Trading Commission and Britain’s Financial Services Authority.

But talk to bankers and current and former traders in the markets, especially those who specialized in interest-rate swap transactions, and it turns out that this generalized state of shock may be a tad disingenuous. For suspicions about manipulation of Libor, the London interbank offered rate, and its European cousin Euribor, the European interbank offered rate, are both manifold and long-standing. In the Barclays case, the CFTC found evidence dating back to 2005. But the bigger doubts about Libor and Euribor’s reliability became particularly apparent after the bankruptcy of Lehman Brothers in August 2007 and the ensuing turmoil in bank lending markets, when credit all but dried up.

Starting in the fall of 2007, almost five years ago, the financial press started writing about potential abuses, reflecting what their sources were telling them. Gillian Tett in the Financial Times appears to have been the first: On September 4 of that year she quoted a banker as calling Libor “a fiction.” The Wall Street Journal in April 2008 also ran the first of several articles about Libor’s reliability.

At the same time, suspicions started being aired in more official circles, including at meetings of bond trading associations and even in government publications, using data from the markets themselves. How so? Largely it has to do with the nature of Libor and Euribor themselves.

These rates are set by panels of banks who meet daily to disclose the average rate at which they can obtain unsecured funding for a given period. The Libor fixings, for example, cover 10 currencies, and the periods range from overnight up to a year. The top and bottom 25% of these submissions are eliminated, and the rate is calculated using the average of the 50% that are left.

But, critically, the rates that the banks submit in these sessions are not the rates they are actually paying to borrow money, but rather the rates that they estimate they would have to pay. Until the 2007 crisis, the Libor and Euribor rates tracked quite accurately the rates that were actually transacted, and which are noted by central banks. But suddenly, after Lehman, there was a very significant divergence between the benchmark Libor and Euribor rates, and the actual transaction rates.

Jean-François Borgy spotted that at once. He’s a French former swaps trader with a long record in the markets, having worked for Credit Lyonnais, Banque Worms and Natixis. He was so struck by the change that, in October 2007, he gave a presentation to the annual meeting of the European Bond Commission.

In a series of charts, he showed how the Euribor three-month rate had, since the 1999 introduction of the euro as a currency, almost without exception been mirrored by the effective European overnight rate based on actual transactions. The spread, or difference between this Eonia rate and the Euribor rate had consistently been 6.3 basis points, or 0.063%. But with the crisis it suddenly jumped to 40 basis points, or 0.4%. For a trader, that’s a huge and obvious change. As Borgy explained in his 2007 presentation, the Eonia rate is drawn from the same 47 banks who are involved in the Euribor fixing; the difference is that Eonia reflects real transactions by the banks, while Euribor simply reflects what the banks say they will do.

One obvious explanation for this huge discrepancy was that, in the market turmoil post Lehman, banks had a huge interest in playing down their own difficulties in the interbank lending market, to avoid scaring their counterparties, shareholders and regulators. That appears to have been what happened in the Barclays case, where Diamond’s colleagues interpreted questions from the Bank of England about the bank’s high submissions in the Libor process as a tacit go-ahead to artificially reduce those submitted rates.

Borgy’s presentation attracted the interest of the French financial authorities, and he ended up writing a short article about his observations for the French Treasury Agency’s monthly newsletter. It was published in November 2007.

If the highest French authorities were aware of the discrepancies, chances are that other authorities were too. On Tuesday, the New York Fed acknowledged that in late 2007 it had received “occasional anecdotal reports from Barclays of problems with Libor,” and that in spring 2008, it had inquired further as to how Libor submissions were being conducted. The Fed said in a statement that it had shared its analysis and suggestions for reform of Libor with British authorities.

Peter Gumbel writes about European business and finance from Paris, where he has lived since 2002. He was worked as a staff writer for The Wall Street Journal, TIME and Fortune. The London-based Work Foundation named him "Journalist of the Year" in 2005.

Gumbel's latest book is France's Got Talent: the woeful consequences of French elitism. A digital version is available in English.

The flaw in all economic systems is human greed. Communism fails to take into account differences between people's ambitions, leveling them and relegating the motivations for the ambitious to doing no more or better than the laziest. Socialism removes the incentive to be ambitious by removing the financial rewards of that ambition. Capitalism rewards ambition to a fault and to the detriment of the rest of society. Replace ambition with greed in all of those and you will see what I mean.

Capitalism is imperfect, but so far the best system for reward. The trick is to have enough reward to make ambition worthwhile, but not so much as to allow it to detrimentally affect society as it is doing today. While the conservative-minded will argue that unfettered capitalism is the only way to go, we've seen what unfettered capitalism has done to the world.

The simple fact is that in a capitalistic society, money MUST be spent to keep that economy going. While the wealthy do, indeed, spend a lot of money per person, there are fewer and fewer of them spending ENOUGH money in enough places to keep an economy going. Instead, as the flow of money goes to the wealthy, they, in turn, invest it. Investing money doesn't create jobs in a stagnating economy. What creates jobs in a stagnating economy is SPENDING MONEY. Money spent stimulates demand for goods and services. When demand is higher than the capacity of a business to accommodate, it hires more people. They, in turn, get paid more and spend more, stimulating more demand. That demand is what creates jobs. The only "economic incentive" to hire people is to fulfill demand. Otherwise it's a drain on the bottom line and no prudent business will hire more people when there isn't a demand for their products.

Why people and governments don't get this, I don't understand.

This is a boom or bust cycle, with money flowing to the wealthy in all cases. There has to be a limit, determined by economic conditions, as to how much capital the wealthy can tie up in their investments which essentially removes it from an economic system (Argue all you want about this, investment only stimulates an economy in good times). If it's too much, the excess must be distributed back into the system to be spent. If the wealthy gave away their investments to the people who actually spend it instead of pocketing it, there wouldn't be a problem.

Equally, there has to be a control on how much money is circulating in the system to keep from having too much out there to detrimentally impact limited resources. Rampant consumerism is just as bad for society as economic stagnation. Market manipulations also tend to break the system with speculators driving up prices long before the actual demand does, creating false stagnation that doesn't need to exist - simply for the sake of greed.

It's called economic balance, removing the boom/bust cycle with slight ups and downs that don't put millions out of work and doesn't create billionaires in the high times.

Prudently regulated capitalism can work, but it must be implemented from the top down in order for peaceful change to happen. Frankly, I don't see the top wanting to regulate themselves ever. Which means the only alternative left is revolution - imposing change from the bottom up. Whether it's peaceful or not (yes, peaceful revolution sounds like an oxymoron), remains to be seen. But the gap between the fewer number of haves and the growing number of have nots is only getting wider. Wealth is being consolidated into the hands of a relative few. History has shown over and over what happens when that inequity grows too great.

That said, one wonders what form the guillotine will take in the 21st century.

This speculative favoritism has existed for decades, but it could be buried when the world economy wasn't totally in the crapper, as you could hedge a bit in different markets and balance risk. Not now. Every market is absolutely tied to every other market, and the boys that were 'too big to fail' continued their sorry crony 'paper games' at taxpayer expense, even after being forewarned by 'bubbles' years earlier. You'll probably end up seeing most of these institutions either dissolved and/or nationalized in order to prevent total chaos, but the damage caused will be long lasting.

It all class warfare with a wink and a nod that's why the next elections we should replace the long term seasoned veteran legislators with new green unsullied freshmen its time for a seniority clean out and to elect all moderates regardless of party

"If the highest French authorities were aware of the discrepancies, chances are that other authorities were too. On Tuesday, the New York Fed acknowledged that in late 2007 it had received “occasional anecdotal reports from Barclays of problems with Libor, and that in spring 2008, it had inquired further as to how Libor submissions were being conducted."Now the facts are trickling in. People at the highest levels - in the financial institutions, the agencies who were supposed to regulate them and the politicians - were colluding to defraud billions. These crooks got the tax payers to bail them out when they got into trouble. And no action was taken against any of them.